Warren Buffett's Letter to Shareholders -- Viewed as a Series of Charts

You read what Warren Buffett said in his letter to shareholders this weekend, now let’s go to the charts. Over the last 47 years, Berkshire Hathaway (BRK.A) has produced growth in book value per share from $19 to $99,860, a rate of 19.8% compounded annually. Amazing.

Buffett likes the insurance business, which provides costless capital to fund other investment opportunities for Berkshire. Insurance premiums become “float” which is invested for Berkshire’s benefit. The Berkshire insurance operations have had nine consecutive years of underwriting profits, totaling about $17 billion. Over the same nine years float increased from $41 billion to its current record of $70 billion.

Berkshire has used the capital to build up large ownership interests in the “big four”: 13.0% of American Express (AXP), 8.8% of Coca-Cola (KO), 5.5% of International Business Machines (IBM) and 7.6% of Wells Fargo (WFC).

In addition to the “big four”, Warren and Charlie had Berkshire buying its own stock last September. Berkshire said it would repurchase its shares at a price of up to 110% of book value, so it bought $67 million of stock over a couple days and stopped once the stock rose over the limit. A Berkshire director compares this to “shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping”. The chart below shows the dip Buffett bought into.

Berkshire operating businesses did well. The five largest non-insurance companies – BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy – delivered record operating earnings. “Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping $10 billion”, said Buffett.

There were a couple negatives. Real estate-related investments and Energy Future Holdings were challenging. Last year Buffett said “a housing recovery will probably begin within a year or so.” He now acknowledges that was overly optimistic. Berkshire has five businesses tied to housing activity, with aggragate pre-tax profits of $513 million in 2011, down from $1.8 billion in 2006. In Buffett’s view, the employment situation in the U.S. will recover with the housing market.

Buffet also discussed his philosophy of investing – “forgoing consumption now in order to have the ability to consume more at a later date.” He breaks investments into three categories. First, investments that are denominated in a given currency (interest-rate products): money-market funds, bonds, mortgages, bank deposits, and other instruments. He calls these some of the most dangerous assets. “Their beta may be zero, but their risk is huge.” As the Fed continues to print money, the dollar continues to lose value. Thus the high risk of holding dollar-denominated assets.

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